The Most Innovative Thing About Amazon Is Not What You Think

There is much to take from this piece by Zach Kanter on how Amazon is building an unassailable dominance and competitive advantage (‘I believe that Amazon is the most defensible company on earth’). Beyond the standard Amazon attributes that are oft talked about (innovation rate, longterm view, customer-centricity, vision, culture, CEO) it is, says Zach, their truly innovative approach to organisational structure and capability that is swiftly making them unreachable.

Key to this approach is the application of a service-oriented architecture to successive capabilities which establishes separate parts of the company as individual platforms. This in turn opens each of these businesses to outside competition, ensuring that they avoid the inefficiences that can come from vertically integrated businesses (in other words avoiding the danger of becoming fat and complacent from having a captive, internal customer without external competition).

The most obvious, and perhaps original piece of this SOA architecture he says, is Amazon Web Services, where Amazon turned their own technology infrastructure into a hugely valuable external product ($14Bn annual run rate valuable). The biggest lesson from this stroke of genius was how by ‘carving out an operational piece of the company as a platform, they could future-proof the company against inefficiency and technological stagnation’.

This taught Amazon the value of rebuilding each of its key tools as an externally consumable service, something which it has been systematically doing ever since. Think about its approach to Alexa which most legacy companies would likely have kept as a closed service that worked only on proprietary Amazon devices (like the Echo). Opening up Alexa as a platform for developers to build on has resulted in it gaining over 10,000 ‘skills’ in just over a year, immeasurably increasing its value to customers. Opening up the capability to integrate Alexa into third party devices means that it is now being incorporated into everything from TVs to lighting to clocks to cars. It is now fast becoming Amazon’s Operating System and in the process on its way to positioning itself as the default voice Operating System for the smart home and smart car.

Similarly, Kanter gives the examples of their cloud-based, self-service contact centre platform AWS’s Amazon Connect (based of-course on the same technology as that used in their own call centres) and their Fulfillment By Amazon (FBA) programme which provides a highly competitive end-to-end fulfilment service for third-party sellers involving shipping, storage, ordering, despatch, delivery, returns, and even customer service. And they don’t limit this to products sold on Amazon.

There are some more obvious benefits that come from this approach such as revenue, increased shipping volume and leverage, and improved usage of excess capacity (according to the piece 25% of their total revenue, or $6.4Bn in Q1 2017, now comes from third party seller services and commissions). But the point adeptly made is that the lasting benefit is the ability to hone and improve internal operations through external competition and the best kind of feedback loop that there can possibly be – whether that specific piece of Amazon can survive and prosper in the open market.

They would have been a time (and not so long ago) when allowing the open market to utilise your infrastructure in this way would have been unthinkable. And yet for Amazon, the application of this approach is systematic and comprehensive. Amazon Marketplace has long enabled third party sellers to not only sell their products on Amazon but benefit from their exceptional sales and service infrastructure. But they are so customer-centric in this approach that they have even gone as far as making the tools they use to set their own prices available to third parties so that prices on Amazon are the most competitive that they can possibly be. Their Marketplace Web Service (MWS) API enables sellers to be notified instantly of competitive price changes (including those from Amazon itself), which has in turn led to a burgeoning ecosystem of algorithmic price optimisation tools akin to high frequency trading.

Amazon’s approach is reflective of a broader shift from pipeline to platform business models but this is taken to a uniquely comprehensive level. Proposition by proposition they are capitalising on external competition for discrete parts of their business, and in doing so are creating an unrivalled powerhouse of infrastructure and services that can enable horizontal innovation (and not just vertical) to propel them into new categories.

We hear a lot about how innovative Amazon is as a business and yet we are in danger of missing the most ground-breaking innovation of all – the fabric of how their business itself operates.